Question

Consider a market where supply and demand are given by qxs = -18px and qxd = 90 - 2px. Suppose the government imposes a price floor of 41, and agrees to purchase and discard any and all units. What will be the new quantity supplied and quantity demanded in the market?

1) Quantity supplied will decrease and quantity demanded will increase
2) Quantity supplied will increase and quantity demanded will decrease
3) Quantity supplied will remain the same and quantity demanded will decrease
4) Quantity supplied will decrease and quantity demanded will remain the same

Answer 1

With a price floor of 41, the quantity supplied will increase and the quantity demanded will decrease according to the given supply and demand equations.

Step-by-step explanation:

When a government imposes a price floor, the market price is set above the equilibrium price, leading to a scenario where the quantity demanded (Qd) is less than the quantity supplied (Qs). Since the government agrees to purchase and discard any and all units unsold at the price floor, the suppliers have an incentive to increase their supply.

Therefore, going by the supply and demand functions qxs = -18px and qxd = 90 - 2px, with a price floor of 41, the Qs would increase and the Qd would decrease.

Specifically, the new quantity supplied will be qxs = -18(41) = -738 and the new quantity demanded will be qxd = 90 - 2(41) = 8.

Hence, the correct answer is that the quantity supplied will increase and the quantity demanded will decrease.